Dutch coalition teeters over cuts as EU pact struggles

Netherlands' Prime Minister Mark Rutte holds a news conference at the end of a European Union leaders summit in Brussels March 2, 2012.Yves Herman

Reuters Staff

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AMSTERDAM (Reuters) - The Dutch government teetered on the verge of collapse on Monday in a crisis over budget cuts, spelling the likely end of a coalition which has strongly backed a European Union fiscal treaty and lectured Greece on getting its finances in order.

The row erupted at the weekend when the anti-EU Freedom Party refused to agree with the centre-right coalition on how to cut 14 to 16 billion euros from the budget and get the Dutch deficit down to the EU target. New elections are now a near certainty.

"I assume it is inevitable," deputy foreign minister Ben Knapen told Dutch news program RTL Z. "It is important that everyone who bears responsibility stays calms and makes sure we get an orderly budget. We do have big problems," Knapen said before he entered a cabinet meeting.

Prime Minister Mark Rutte's minority cabinet, which relies on the populist Freedom Party to get legislation through parliament, met to discuss whether it had any hope of pushing through the budget cuts - and whether to offer its resignation. New elections could be announced as early as Monday, and would most likely be held in September or October, analysts said.

Rutte and Finance Minister Jan Kees de Jager - who flew back from IMF talks in Washington when the crisis broke - have been among the euro zone's harshest critics of "budget sinners" such as Greece and Portugal.

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The Netherlands has been close to Germany in calling for tough austerity measures across the euro zone, and in supporting the EU's fiscal pact which must win parliamentary ratification by the end of the year in the 25 countries whose governments signed up to the treaty.

The prospect of new elections pushed up borrowing costs for the Netherlands, traditionally one of the strongest euro zone economies, as the country was drawn into Europe's debt crisis.

Rutte, whose coalition has been in power since October 2010, failed to agree the cuts with Freedom Party leader Geert Wilders after seven weeks of talks on the same weekend that the far right performed strongly in French elections.

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Anti-immigration crusader Marine Le Pen jolted the French establishment on Sunday by winning 18 percent of the vote in the first round of the presidential election, the best result for a candidate of the National Front.

The Dutch crisis also flared at a time of wobbling support for the EU fiscal pact.

The Socialist frontrunner to win the French runoff next month, Francois Hollande, has promised to renegotiate the compact. This has alarmed financial markets, which fear he could throw the EU's commitment to fiscal discipline into question, although his aides insist he will not try to pick the treaty apart.

France has already lost its triple-A credit rating and the Netherlands may follow suit if it fails to make the budget cuts.

"Our competitiveness, credibility and triple-A status are at risk because Wilders has walked away. That is very costly. The interest rate on our state bonds can run up," former Dutch minister and current European Commissioner Neelie Kroes was quoted as saying in Dutch daily De Telegraaf.

The cost of insuring Dutch debt against default rose to its highest since January as the country slipped into crisis. Dutch five-year credit default swaps rose 9 basis points to 128 bps after the failure to agree on the budget with Wilders, whose party is outside the coalition.

"This represents a potential sizeable stumbling block to the already challenged fiscal compact," Rabobank said in a research note. "A failure on the part of a core country (and one we judge as 'true core' at that) to adhere to compact's deficit limits will represent a powerful debasement of the treaty."

The crisis would make it harder for Germany and other core members to sell the idea to voters that "bailouts are not a free lunch - they come with a policy straitjacket", it added.